Wave Systems Corp. Q3 2008 Earnings Call Transcript

Nov.28.08 | About: Wave Systems (WAVX)

Wave Systems Corp. (NASDAQ:WAVX)

Q3 2008 Earnings Call

November 10, 2008 4:30 pm ET

Executives

Steven Sprague - Chief Executive Officer

Gerry Feeney - Chief Financial Officer

Analysts

Timothy Collins - Security Research Associates

Ronald Meyer - REM Financial

Operator

Welcome to the Wave third quarter conference call.

(Operator Instructions)

I will now like to turn the conference over to Mr. Gerry Feeney, Chief Financial Officer. Please go ahead sir.

Gerry Feeney

Thank you. Good afternoon, everyone. During the course of this conference call we may make forward-looking statements regarding future events or the future financial performance of the company. We caution you that these statements are only predictions, and that actual events or results may differ materially.

Additionally, we refer you to the documents the company files from time to time with the Securities and Exchange Commission. These documents identify and describe important factors that could cause the actual results to differ materially from those contained in any forward-looking statements that we may make.

At 4:00 O'clock this afternoon, we released our financial results for the third quarter of 2008. These can be found on our website at wave.com. Please refer to the company's press release for more details relating to the financial results.

For the quarter ended September 30 2008, Wave's net revenue rose 6% to $1.835 million, compared to the third quarter of 2007 net revenues of $1.734 million.

During the quarter licensing revenues increased primarily due to increased shipments of Wave's software by our leading OEM partner. Total billings for the third quarter of 2008 rose 36% to $2.297 million, compared to the third quarter of 2007 total billings of $1.695 million.

As reviewed in last quarter's conference call, management considers total billings, which is a non-GAAP category, an important measure of our financial performance, as we believe it best represents the continued increase in demand for our software license upgrades.

Consistent with our revenue recognition policies as outlined in the company's 10-K, as software upgrade billings grow, we would expect to see net increases in our deferred revenue. Although we bill our customers upon shipment of these upgrade orders, and collect cash under our normal accounts receivable terms, the company will recognize revenue for these upgrade orders randomly over the maintenance period, which is generally 12 months.

And as such, deferred revenue at September 30, 2008, increased by 78%, or $462,000 to a balance of $1.05 million, as compared to the deferred revenue balance of $589,000, just 90 days ago on June 30, 2008.

Gross profit rose to $1.628 million or 88.7% of net revenues in the current quarter versus gross profit of $1.524 million or 87.9% of net revenues in the third quarter of 2007.

A net loss for the quarter was $5.605 million or $0.10 per share, compared to a net loss of $4.778 million or $0.10 for the third quarter of 2007. The increased net loss reflects increased spending in both R&D and SG&A expenses, principally reflecting increased head count in sales, customer support, and engineering, as well as higher fees for translation services relating to Wave's product development, and higher broadband charges relating to Wavexpress' downloads of the 2008 Olympics.

The weighted average number of basic shares outstanding for the third quarters 2008 and 2007 were approximately 57896000 shares and 49737000 shares respectively.

At September 30, 2008, Wave had total assets of $2.985 million, and subsequent to the close of the third quarter Wave completed a $721,500 offering of Series J convertible preferred stock, and began to implement a series of cost reduction measures aimed at reducing the Company's ongoing operating expenses in Q4 and into 2009.

And now Steven will highlight some of the key developments for the period.

Steven Sprague

Thank you, Gerry. Thank you, everybody for joining our call today. We appreciate your support and your interest.

I thought, I would start today by spending a little time on the launch of the Dell E-Series platform. This is a new model year for Dell in their laptop and Workstations and desktops across their corporate PC lines. And we're very pleased to be providing the software for the E-Series platform.

And there are a number of fairly substantive enhancements in the security of that platform. Wave has been really key to participating in that. I though, I would a couple of them, just so that everybody has a general appreciation. It might only take a minute or two on this.

One of the important characteristics that's changed in the E-Series platform is that Dell now has an enhanced security hub that includes not only the Trusted Platform Module functionality, but the interfaces to all the other security devices.

And one of the reasons why this really enhances the security of the Dell laptops, as an example is, that for example your biometrics, when you scan a fingerprint, those fingerprint matches actually take place inside this new security hub chip. That ensures that that data when being compared can't be actually compromised.

It also provides enhanced interfaces for smart card and Contactless cards. Actually, one of the really fun tricks for anybody who has a Dell Latitude E-Series platform, it supports a Contactless smart card and actually you can take, for example, it works with the Boston subway token actually the MiFare Card, which is a Contactless smart card, could actually be enrolled as a Contactless authentication token with your Dell E-Series platform. So if you happen to have traveled through Boston or you're in Boston, you can use one of those tokens and experiment with the Contactless card capability on the platform.

So in this way you can actually just wave your ID card in front of the machine and it would log you in all the way from pre-OS, up through your Seagate drive, or up through Windows to your operating system.

We have been the only supplier of software for this new platform. This is a new capability that is unique to Dell. We're very pleased to be working closely with all the vendors who are involved. It has been a multi-party effort to bring these capabilities to Dell. And Wave played a very significant role in that.

You can find all of this functionality in E-Series platform under an interface called Dell ControlPoint, which actually integrates communications, and security, and a number of the other devices within your machine, so that you have a single interface to find all of this functionality.

In addition, the new Dell platform supports Seagate's higher speed drives that were just announced today. So they're now available in 7200 rpm speed. That has been one of the challenges for us over the course of the last year or so, where the Seagate drives were only available in a 5400 rpm drive, and so people who wanted a very high performance laptop wanted to be able to buy the highest performance drives.

And now Seagate has made available, with full disk encryption, their highest performance drive products for notebooks. And so, really there is now no reason to buy a laptop without a full disk encrypting drive. And really anyone who is out there specking or designing a machine or selecting a machine should make sure that they have a machine that comes with an encrypting hard drive for a number of different reasons.

There was a little confusion today in Seagate's press release. They were also announcing support from the McAfee SafeBoot team, and certainly some of the reporters inadvertently connected the dots thinking that McAfee was supplying Dell. That is not the case. Wave is not only supplying Dell today, we fully expect to supply them for the foreseeable future. So I don't think there was anything there, but there were definitely a couple of reporters who got that connect the dot there not really correct.

So we're very pleased to continuing to supply Dell with the full disk encryption software that ships natively from the factory. One of the huge advantages that Dell has in the marketplace today is that their PC's come with the software installed at the factory, ready to go. It takes a matter of really seconds for the individual user to set up their full disk encrypting drive.

We continue also to supply Dell on a worldwide basis. We have expanded the number of languages in this release that we support. I think the current software released in the market is at 19 languages and we're on our way to 25. So we truly support them on a worldwide basis, with all the different language support, and all their different distribution channels.

There are definitely challenges to that. There are also tremendous advantages for us in that. We have been working with them in Europe in Asia, as well as in North America on sales tours that we continue to do. We did a number during the course of this summer.

We believe collectively we have seen something in the neighborhood of 100,000 business customers. Have had the opportunity to see these platforms and had the promotion of a whole day in front of Dell's products. And we're pleased to be part of that as well.

Really important aspect of the new Dell platform launch is this actually brings into effect the higher pricing on a revenue per unit that we negotiated with Dell a year ago in order to do this work. So as part of bringing additional languages, supporting the new hardware in the platform, and a number of features and capabilities that we brought to Dell, we are able to increase our price across the product line.

While it has taken longer than we certainly expected for those platforms to come into the market, we were expecting them in mid-summer, they are now shipping in full force. You can go to their website and buy an E-Series Latitude laptop or their Precision Workstations with the new platform.

They are still shipping the D-Series platform, although, that is expected to phase out over the course of the next few months. So that will move us entirely to the higher revenue stream.

It has been a little bit complicated for us to have a precise prediction on the actual cash volume in royalties to us, because we're in a mix right now between the two. And we have an expectation that the D-Series platform will also carry the new software and that will carry the higher royalty rate as well.

That royalty rate change is an 80% change in price that brings us to almost $0.50 a unit. So it is very important to us moving towards the company becoming cash flow break even in the marketplace.

And we're very pleased to have been able to supply them with an enhanced capability and really a very unique set of features that are unique to the Dell platform, but based on industry standard capabilities. So that an enterprise can deploy this across a very wide array of machines, but if you happen to pick a Dell machine you have slightly better security, you have slightly better ease-of-use, you have slightly better integration.

Overall, it brings the cost of ownership down, and makes easier to buy a Dell machine than to buy another brand with these same capabilities.

In the course of the last quarter, we were also successful in executing a relationship with Acer. They're the number three largest PC manufacturer in the world. We are now shipping our software on their desktop products. Those products are available in the marketplace today.

It is a little bit too early for us to give any indication as to what the actual volumes have been. This is the beginning of a ramp. Hopefully, we look forward to supplying very broadly across Acer the products that they need.

Today we are providing a fairly simple implementation of our EMBASSY Trust Suite to enable the capabilities on their desktop machines, and we certainly look forward to expanding our support within Acer as we go forward.

The early indications are they're very pleased with the software. The market response has been very positive. They felt they needed the full suite of capabilities to compete in the marketplace successfully, and that Wave has been able to provide that to them.

Our enterprise business, which is core to the growth of our business, so we make money on licensing software to the PC OEMs, similar to Dell and to Acer and others, and then we provide an upgrade sale to the enterprise.

Our upgrade sales, we have had the strongest month we have ever had in the month of October. So while we're a little worried as to what the effect of all the financial upheavals would be in the market, we have had very strong support for the software in October.

To the tune that we have seen almost as much business closed in the month of October, as we closed in the entire previous quarter. We're only a few thousand dollars away from that. And we're finding that the average customer order size is going up. The number of new customers is going up, which is important because we typically see reorders.

We have seen it across different marketplaces. We have had business close both in the US and in Europe. So we're very pleased with how the quarter has started up, and we are seeing continued connection with the enterprise's focus on moving towards hardware.

Still a tremendous amount of this business is around the data encryption side the encrypted drives. Although, we're seeing many more customers, who are deploying the encrypted drives also deploying some of the features and capabilities of the trusted platform module.

We actually just finished the end of last week in a large healthcare provider, not only trusted drive deployment, but also they're using the TPM as part of their overall wireless VPN solution, which is really an excellent way to leverage the Trusted Platform Module as a starting point.

The other piece that we have been very focused on is helping to align our operating expenses and bring them in line with the revenues of the organization. To that end, we have reduced about a $1 million of operating expenses already expected out of Q4. We're on target to increase that number to about $1.5 million in operating expense reduction in Q4.

And part of this is, how do we both line up the revenue side of our business and the expense side now that we have a growing revenue base underneath the OEM side? We are comfortable that we can get to a cash flow breakeven basis on a combination of licensing and our enterprise upgrade business.

And that we can maintain the scope of an organization that is necessary to support the customers in the manner that they have become accustomed to. And so, as our revenues grow, because we will see the underlying licensing revenue grow, and should grow by almost double, that we can bring the expenses down in line with that.

So we still have some more work to do. We are making progress on that front. And we still are very challenged in the marketplace right now in access to capital just because it has been a very difficult time to raise capital.

Having said that, we have been quite successful in raising capital from long-term shareholders. We have been able to bring investment in from those who are interested in holding our stock on a long-term basis, I think we have put it into very good quality hands and it really has helped to support the stock.

The company is making progress on that front. It is challenging I won't say it is simple and it is not without its risks, but at the same time we seem to be able to maintain access to capital. We are reducing our expenses and we are seeing a substantial growth on the revenue side.

One of the challenges that we had over the course of the month of September, and really reflected into our operating numbers, and I would love to be able to provide more clarity on it, although, I can give you some sense of it, but I'm not sure I can give you as much clarity as you would like is that;

We saw in September not as much specific hardware volume as we were expecting. We think most of that was due to a very short-term interruption in the volume of shipment of units that we don't think will be reflected at all in the course of looking at the volumes over a longer period of time.

So I think we were caught in the last week or two of September in really the close of our quarter which is very different for example than the close of Dell's quarter. And as a result, our expectations of what the volumes would have been were light by a significant number. And we have no reason to believe that that won't be fully made up for in the subsequent weeks that have already slipped.

We saw some of that in the marketplace as well where there were new systems that were ordered that subsequently shipped, but shipped a couple weeks later than expected. So we would have liked to have shown a few hundred thousand dollars more in revenue that would have been a result of that, but we'll see how that ultimately appears within the fourth quarter.

I think we don't have any more clarity than that. We know there was a chunk of units that weren't there, and we fully expect that they will appear in the shipment of the October month's shipments. So we'll see how that continues to form up. We would have expected to have a slightly stronger quarter in the third quarter than we actually did.

In addition, in the context of third quarter, we have had some other very significant developments that I think as we look forward into the future will continue to also dramatically drive the revenue side of the company.

One is that, we launched new Intel desktop motherboards in support of the integrated trusted platform module capability. And so, inside the Intel chipset now is the trusted platform module functionality, and our software is driving the support of that Integrated TPM.

That's the first piece of two pieces of Anti-Theft Technology from Intel under their vPro brand. So when you see an Intel ad that talks about vPro, under vPro there is something called Anti-Theft Technology, and that encompasses both the trusted platform module and a data encryption capability.

We demonstrated in August the data encryption capability with a technology that was originally code named "Danbury," and is now called Anti-theft and Danbury provides full disk encryption from the motherboard side of the PC. This is important because this capability will show up in Intel chipsets on a worldwide basis across all platform vendors.

So those companies who want to take full advantage of the native data encryption capabilities of the Intel chipset, Wave has a solution that can provide that and provide seamless capability, same look and feel of software, same type of commands to manage the integration of Intel's Anti-Theft, the Seagate drives, and we have also demonstrated support for Toshiba's new full disk encrypting drives as well.

So as the industry branches out and moves data encryption into hardware, Wave intends to provide the software to support that underlying hardware in a very common set of screens, common set of capability, independent of the technology actually selected.

With Toshiba, this was a technology demonstration. So this is based on a reference platform. They're not yet production products. As they get orders for their production products, we certainly look forward to working with those customers to evaluate, and hopefully, select Wave as the software they were to ship in the box.

Finally, a couple of pieces. One is there were a couple of communications during the course of third quarter from our eSign team. One of the larger projects that we are involved in, we closed a multi hundred thousand dollar project that is a licensing deal. So it will actually be revenue built out overtime. We should see almost all of that over the course of the next 12 months.

With a major European bank to provide a consumer application for electronic signing, we're very enthusiastic to help provide this. It's our first piece of international business with electronic signatures and it provides us a direct to consumer-facing application.

We think that as that application comes to market and they are comfortable in launching it and talking about it in more detail and the functionality, I think it will really show people that we can take what is a paper-based process today and move it to an entirely electronic process. And it is a fantastic way to initiate different types of transactions.

And so, we think overtime this will start to show how the fabric of these two pieces connect from a transactional-based business that has ongoing transactional potential revenue with a business that's tied to security and identity and all the parts that go with that.

We also demonstrated a leading mortgage application for actual closing of full mortgages. And so, in partnership with a number of companies Xerox included, we're offering a platform today where you can do an entire electronic closing of your mortgage. That means signing all of the disclosure documents, signing potentially your mortgage documents, as well as any notary documents that have to be executed as well.

So, for almost everybody who has ever gone and gotten a mortgage, all those 25 different pieces of paper you have to sign can now all be executed electronically, and then that packet of material remains electronic all the way through the distribution chain. So one of the big problems that have been in the mortgage banking space has been keeping track of all these disclosure data and this allows a complete electronic transaction around the mortgage and all the disclosure data associated.

So it's been interesting. The mortgage industry has been extremely active in this space even though they are under great distress from a financial perspective. Now is the point in time where they are looking to technology to reduce their cost, improve their efficiency. We see a much higher level of interest today than we did at the height of the mortgage craze 12 months ago.

So, Wave is in a very strong position. We have absolutely one of the leading platforms. We have some great partners. We're making transactional revenue for every document signed. It's a small team within Wave. Its cash contributing to the bottom-line and it really ties in very nicely with the whole direction of identity and the security of the platform.

And finally, and then I'll open it up for questions, let me talk a little bit about Wavexpress. When we had our last conference call, I believe it was just at the beginning of the Olympics, we had a very successful Olympics. For anybody who watched the Wavexpress coverage of the Olympics, I think everybody was impressed with the quality and capability that team was able to deliver. We continue to have a great relationship with Microsoft on that front. We're looking forward to the Wavexpress team doing additional events.

Having said that, we have been actively in the market seeking external investment into Wavexpress and/or the potential acquisition. We have a number of paths that we're pursuing in the marketplace today. There is certainly no assurance that any of that will come to ground, but we're getting very close to the end of that process.

We have to both manage our expense side as well as manage the opportunity side. And this is one where I think we have tremendous opportunity, but it is somewhat peripheral to our core business. And so, to that end, we are in discussions with a variety of players, but I certainly have no assurance at this point in time that I'm going to necessarily close a transaction any time soon.

So we'll see how that continues to progress. I know that's not definitive data for everybody today. You would like to have more definitive data than that. As we make the decisions around that to pursue the different opportunities that are presented to us, we'll certainly communicate them out to everybody.

So it is a tremendous platform. We have tremendous partners. We have some very strong offshore interests in the platform as well. I think all of those pieces are helping us together to drive it towards a transaction, but I have to balance that with the amount of time it would take to execute the transaction. So, we're in the middle of that process right now.

With that, I think I will stop my prepared conversation and open it up to questions. I'm sure there will be plenty of questions and I will do my best to answer all the questions we have today and move forward from there. Thank you, everybody, and thank you for your interest.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Timothy Collins. Please go ahead, sir. Mr. Timothy Collins, your line is open, sir.

Timothy Collins - Security Research Associates

Steven, I want to congratulate you and the team on the upgrades. I think that the essence of the business is the upgrades. And so, I would like to ask you to give us a little more color about that. I see that the income has risen to $1 million. I mean this is only like the third quarter that you've been able to speak about deferred income.

Can you also tell us a little bit about some of the people who upgraded and what their comments were about upgrading? And then, I have a follow-on question after that.

Steven Sprague

Okay. So, thanks for the question. The customer base has been very broad. We have recently put up on our website you can go read a testimonial from a company called AdaptaSoft. They are a small software company. We've seen very large organizations like Archer Daniels Midland and we've seen divisions of some of the big health insurance companies.

In general, as I said before, they are purchasing because of the full disk encryption side. There is a mixture. There is a mixture of companies who have never bought any data encryption before, and this was just a logical way to sort of step-in to data encryption and it was easy to buy and easy to implement.

We've also had customers who we've worked with for the better part of 9 or 12 month who have either already got data encryption employed or are in detailed researching it with other software vendors. In general, the best customers are the ones who have already had an experience with one of the top four or five software full disk encryption products.

I don't need to pick on any one of their brands. The comments are equal across the board that the general enterprise sense is they don't like it. They perceive that it has a performance impact. They perceive it's cumbersome. They are not entirely sure it's providing the real protection that they need. And they find that the ability to get a brand new computer out of the box and set it up in the better part of a few seconds with factory pre-installed software sometimes they can't quite get their heads around the fact that it's that easy.

So we've certainly had our own share of challenges in implementations, especially when you get to unique integration with other peoples IT back offices. But, in general, I would say people are quite happy with us and we hear almost nothing from a customer support perspective. Most of our customer support calls come from individual users of our software on Dell machines.

For the enterprises, we've actually deployed our enterprise upgrade. We hear very little. Once it starts to work and they get it configured and running, it runs very seamlessly. We have one installation that's got 2,500 seats now. We've got another installation that's in the 1,400 to 1,500 seat level, and they're amazingly quiet from a perspective of any challenges and they continue to buy new units every quarter.

So I think the fact that they continue to buy would indicate that they're happy and they're not having too much difficulty because they're able to solve whatever challenges they have without calling us.

So the upgrades have grown quarter-on-quarter. I would say actually third quarter for us was not nearly as strong as we would have liked to have seen and we are seeing much more of that action now in the fourth quarter. The volume is growing per customer from 20 seats to like more like 100 seats per customer.

We're seeing consistent reorders. We had a big university that reordered 500 units just the other day. This month of October almost every day we saw a new order come into Wave, which is really unprecedented for us and it's just fantastic to see. It's just the level of volume that we expected to see a year ago.

And so, we're still extremely optimistic about it, but also appropriately cautious that the enterprise business has been slow to engage. We are now at 40 million installed and paid-for copies of software. And we think that that installed base of corporate desktops that have our brand on them is a tremendous opportunity to upgrade and that's the business we're investing and building in. There are very few companies that have shipped and been paid for 40 million copies of software.

So we're pleased to be amongst that group and the team has done a very good job doing it. My favorite one over the course of the last few weeks was a letter we got from a guy in Zimbabwe who was very pleased with the customer support that we had provided to help him solve a little problem he had with his full disk encrypting drive.

Operator

All right. Our next question comes from the line of [Kevin Gus] with First Place Financial. Please proceed with your question.

Unidentified Analyst

Hi, Steven. How are you doing?

Steven Sprague

I'm doing fine.

Unidentified Analyst

I just had a question. I know in the past conference calls you've mentioned that the IT managers are the biggest problem to getting big seats signed that they just don't get it. Is that what you're still seeing out there, I mean, because you would think that if this was the golden goose that everybody needed, they would all be jumping on and it doesn't seem like we're getting the kind of seats signed that we should be getting.

Steven Sprague

We're certainly not. I mean we've shipped 40 million copies of hardware security in your PC platform and you still can't use it at your Citibank account and you can't use it in your corporation to secure the wireless. This is not a new concept. It's just new in the PC.

So when you pick up your cell phone and you dial a phone number, in the late 1980s and early 1990s, your phone could be stolen by just driving down the FDR Drive in New York. And as a result of that, Motorola initiated a capability where every time you dialed a long-distance number, the phone went [beep-beep] and you had to type to send again or push in a pin number to complete the long-distance call, in essence, a password for every phone call you made.

In the transition to digital cell phones, they put a security chip in the phone that basically has the identity of your phone. And since then the global cellular industry with three to four billion phones has been secure. And you today do not worry about the fact that your phone is going to be electronically stolen by somebody else and that your bill will reflect phone calls made by somebody else.

However, on the PC platform, all of us every single day are concerned about whether we're doing online banking or bill pay or connecting to our wireless or all the different things that we do with a PC. We're concerned that we should be using multiple different passwords. We should be changing them on a regular basis. None of us do this stuff. Yet we have this new capability in every single box.

And so, yes, it is a responsibility for IT to begin to take advantage of it and deploy it and use it. Will that ultimately require some further refinement of technology as it has 40 million endpoints put it into use? Sure. But the capability is in the platform and is available today.

And whether I'm having a conversation with the Department of Homeland Security and reminding them of the fact that not only do we have it in every DHS machine, but it's in every local fire department machine, it's in every local ambulance squad machine, not only in North America, but in the rest of the world, they all have a common platform for communications, but somebody has to turn it on. And so, it's a tremendously powerful capability, but at the same time it's been fairly quietly communicated.

Now, Wave certainly stands on top of its little podium and we scream as loudly as we can. But we're a small organization. What it's taking is organizations like Intel and Microsoft and Dell and companies like Broadcom and Infineon and others who make chips who are large organizations to press this technology forward into the marketplace to demonstrate its value, to use it and deploy it themselves, as well as to support it in the architecture for the systems that they have.

We're seeing more of that. It is the central conversation within the Board of the trusted computing group that the promotion and utilization of the TPM is a very important thing. There is a lot of resource being spent on educating.

At the same time, you can take a little bit of comfort from the fact, for good or for bad that if you go back and read 1998 computer magazines, everybody was wondering whether or not the USB port would ever actually come into use and why we'd need to have a USB to printer connection when the parallel port was working just fine. And today, my Latitude laptop doesn't have a parallel port, but it does have a lot of USB ports and there is something like, what, 7 billion USB peripheral devices that have been shipped in the world at large.

So these technologies take a time to grab hold. It's been a little bit surprising how hard this has been. And that's been what's put us in a situation today where I'm not here talking about how we've made $20 million in revenue. Take 40 million copies, we average a little more than $50 in profit for every enterprise upgrade seat and you only need 1% or 2% adoption for it to be a pretty good sized number for us.

Unidentified Analyst

Has it gotten better with the IT managers over the last three quarters or are you still seeing the same resistance; we have something, what do we need that for?

Steven Sprague

So they're beginning to understand where it fits. They no longer ask us what a TPM is. And if you are at a trade show, somebody walks up to you they are capable of asking intelligent questions. So we're way past the "What's a TPM?" to "Can I do this with it and can I do that with it?" And I think that's where it's getting much more interesting in helping them to achieve that goal. And it's going to take ourselves being successful in this as well as other players entering this space in order to drive it forward.

Today, Wave has one of the only capabilities for enterprise management. There are certainly some enterprise management tools now finally coming out of the Infineon HP partnership, but they are pretty minimal. I mean they are probably a year or year and a half behind us in functionality.

And so, yes, we have some very large organizations that represent 25,000 to 30,000 seats who have expressed interest in turning their TPM's on. We need a few of those. And I'll be the first to say and I know many have said this to me before, I think we need our partners and technology vendors in this space to do this with as much as we have, whether it's Intel, or Dell, or Broadcom, or STMicro or Atmel. They need to be turning their TPMs on and using them at least in the development departments who are building their technology. Wave has. We use the technology broadly across our organization. And as a result, we have learned a tremendous amount. We're one of the few people in the world who has done that.

Unidentified Analyst

Thank you.

Operator

And our next question comes from the line of Ronald Meyer with REM Financial. Please proceed with your question.

Ronald Meyer - REM Financial

Hi, Steven. Many of us now are focusing on fourth quarter sales and if you could give us a little guidance on that. I'm looking at today's numbers and see growth of about 36% or so, and then the new contract with Dell at $0.50, and I'm kind of extrapolating that out times 2.3 million and looking at close to $6 million if that would continue at that growth rate for Q4. Is that close to our break even point? Can we get to break even by the end of quarter fourth or first quarter?

Steven Sprague

We have instituted a number of cost reductions for which we'll see some of the effect in Q4. So our target is that you actually will see an effect of about $1.5 million or so in Q4. And you'll see something more than that in Q1. And so that will help. I think Q4 will be a little bit shy. Q1 between growth on the revenue side and cost reduction we should be there.

We recognize at this point in time that this organization has to be cost neutral. We are committed to achieving that. With one caveat, which is, we have to balance that with also continuing to service our customers. I think that is the place where we have to make sure we are in a position to support our customers as best as possible on their aspirations and expectations going forward.

We are in an emerging market business not a mature business. And as such, it needs the continued innovation and expansion and education that is required. So, we are very focused on it. I think everyone should understand that we will work towards maintaining that balance so that we can continue to invest in the growth of this market.

The trick is unlocking the upgrades of the installed base. And where I would like to get to in the course of the next year, if we have this conversation in a year is what's your expectation on growth of upgrade percentage from this quarter to next. With some track record you're showing that it is growing. And we can start talking about percentages as opposed to 1000 units here and 1000 units there.

I don't have the number exactly right in front of me; we shipped 6.5 million, total units in third quarter. And you're still talking about upgrade business and a few hundred thousand dollars. So the upgrade business is still in trial volume. Obviously, some organizations are doing it in much larger bases than that, but we're still at the early edge of this business.

There is no question in the capability of the technology, but it is going to take some time still to fully realize that. Having said that, we're in tough financial times, which as I look at it sounds to me that the probability somebody else gets $40 million or $50 million invested in them to even have a good shot at trying to compete with us is have a nice day.

Ronald Meyer - REM Financial

Yes timing could be our friend. On the other issues of like government contracts, are we close to signing any significant deal with some arm of the government?

Steven Sprague

We have had a couple of reasonable volume deployments in government. We have over 1000 seats in one installation and there is a couple thousand seat order that we know has been placed on Dell, but the actual shipment chips or the units haven't shipped yet. So our expectation is they will ship in fourth quarter, but I want to be careful that it is our fourth quarter versus Dell's fourth quarter, which would include January.

We have had a lot of work that has gone on with the US Army around the validation and verification of our software. We have had the approvals of our software then sent off to the purchasing side within government to say that we've met all their requirements from an engineering perspective and therefore they would like to have our software purchased for every single machine in the US Army.

I'm now at the point where the purchasing side of the dialogue has begun, although, I would tell you that the current dialogue is, "we're really busy right now, we'll get back to you". So we're trying to ascertain whether get back to you means in a few weeks, or get back to you means in 2023.

Our next step is, to see if we can achieve a schedule for the actual conversation around is this something they want to procure? And I think we have a good understanding of lots of the pieces. I'm not so sure we have a complete understanding of all the pieces. And so, it is why I'm not sitting here saying, "oh my goodness, we could close a multi-million dollar deal with the federal government very soon. It could be very soon it could be 12 months away.

We've made tremendous progress over the course of the last quarter. There is still a lot of work to do. There is a very high level of interest in having hardware security within the PC platform actually engaged, but it certainly is moving at the government procurement pace.

Ronald Meyer - REM Financial

Just one follow-up do you think it will be done by the end of the year one way or another?

Steven Sprague

One way or another for sure, I would say sooner than that. They're already past my internal deadline and I would have liked to have been done by now. And I still have a range of opportunities that are sitting on the table which say it is worthwhile to not just walk away from those opportunities. Having said that, they have a fairly finite time to determine whether we'll see investment, intuit acquisition of it, or something else.

Ronald Meyer - REM Financial

Last question, can you give us an update on our situation going global NASDAQ participation?

Steven Sprague

Yes so we had a hearing with NASDAQ. And in general we think we have a period of time before they will notice us, but realistically they could notice us tomorrow or the next day or whatever. They have a 30-day period before they have to provide us with some communication. And the question is at the end of that 30-day period will they indicate to us that we have some additional time or will they choose to take action at that time?

I think a lot of that is reflected in the share price. I think that this is something that at the end of the day is very much in the hands of the shareholders. The share price that we are at, we do not meet the NASDAQ listing requirements. At a share price that is $0.10 or $0.15 higher than we are today, we meet the $35 million market cap minimums that would allow us to remain listed on national market.

And so that is a challenge the question is as people look at the news flow, the company's prospects, the revenue growth that is out there, the launch of the new platforms et cetera, these are the things that should help. And hopefully will help to continue to drive valuation.

Ronald Meyer - REM Financial

Okay. Thanks Steven.

Steven Sprague

Thank you.

Operator

Our next question comes from the line of (inaudible) he is a private investor. Please go ahead with your question sir.

Unidentified Analyst

Hello, Steven.

Steven Sprague

Hi, John.

Unidentified Analyst

How are you doing?

Steven Sprague

I'm doing good.

Unidentified Analyst

That's good. Steven you said something about the de-phased platform. Can you explain that there? I never heard of it.

Steven Sprague

So there are D platforms which have been shipping for the last four or five years at Dell. And then we moved to an E platform so we'll just stay in the Latitude brand for a second. What does that mean? So in the D platforms there were D-600 D-610 D-620 D-630 all defined there as sort of mid-sized laptop. If you had a D-Series laptop, and you had a docking station, all the D-Series laptops fit into all the same docking stations.

If you made a master software image for a D-630 it would work on a D-830, or a D-430, or a D-820 or a D-620. So from an IT manager's perspective you could almost think of it as a model versus just a model year. Trying to think of a good analogy, I'm not sure I can carry through on a brand, but it is like a Taurus versus whatever Ford's new class of mid-sized car would be.

So as they transition to the E-Series, the engineering department is allowed to change the way the ports are organized, change the screen sizes, change a whole variety of things. So that if you buy a docking station for an E-system, you will not be able to plug a D-system into your E-system docking station.

And so every four or five years Dell does a major transition. And then for the next few years all the E-Series systems should be fairly similar, in that I can run the same software on them, I can reuse the same docking stations et cetera. So the reason that this was important is that Wave was selected for the D-platform and then we were also able to bridge our support within Dell to the E-Series platform, which has new capabilities and some new security capabilities et cetera.

So that is important to us because now we're part of the new model family. And hopefully we'll continue to supply Dell for the foreseeable future on their E-Series platforms. And we certainly look forward to doing that. So today if you go out and go to the Dell website you can buy a D-Series laptop or an E-Series laptop, the newer model.

In the next few months they will end of life the ability to order the D-Series laptop as they run out of inventory. And that's what it says say; they say while supplies still last is what they say on their Dell website. So whether it is January time frame or whatever at that point in time you will now only be able to order the new model of laptop.

This is important because inside a corporation they don't necessarily switch models at the same day that Dell decides to switch models. So if you're a big healthcare company and you have been for the last year buying all D-630s. I can use a specific example. The TSA buys Dell Latitude laptops and they have been buying D-Series. And they may not be ready yet to buy an E-Series, so they are going to continue to buy D-Series for little while, until they make a decision that says, "Oh I want to go through all this stuff and move to the E-Series".

When they do that then they are going to have a little dilemma, which is all those docking stations you see at airport security when you go through. Well the E one is not going to plug into that so that's going to be a challenge for them. So they will have to go figure that out.

Unidentified Analyst

Right. Another question is do you see a lot of competition with all this technology that you're innovating? Do you see foresee really any fierce competition coming around the corner?

Steven Sprague

There is definitely competition in this space. I mean this market may not be by any stretch of the imagination at full pace within he enterprise, but in the supply chain there is tremendous competition. So we were very successful in winning Acer's business and that business was previously held by our competitor Infineon.

Now today, we're at mixed supply, so we supply their desktop line and Infineon supplies their laptop line. And hopefully, we'll execute well and do a good job and provide Acer what they want and be successful in moving their laptop line also to a Wave supply.

We have so far been successful in winning the OEM contracts for software that's shipping in the box with Seagate drives. So 95% of the Seagate full disk encrypting drives that are shipped, ship with our software in the box. So we're very pleased to provide that.

We would like to win software contracts at other OEMs as well. The largest OEM that is out there that is not shipping our software is HP. They ship Infineon in the box. I think they do a good job of both of us keep the other honest. As we move our partners, as Dell and HP respectively forward in functionality and capability, the others have to match.

And typically, I would say Wave has been at the innovation curve. We've been at the forefront of the innovation curve in driving this market forward. We were the first to support full disk encrypting drives. We were the first to support the biometrics in pre-boot. We were the first to support F3 or sleep capabilities on the Seagate drives.

We have been the first to ship any OEM support for the Intel ITPM. We'll see how we do in supporting the anti-theft technology. So we have really done I think a pretty good job of not only competing in this space but also innovating in this space as well.

Unidentified Analyst

Are you doing any more refinancings with the Company? I know you have done a couple in the past. Do you see any more coming?

Steven Sprague

Well we have had a consistent cash need as we bridge to the stronger revenue stream. We would have liked to have done this all in a single transaction a few months ago, but what has been available to us is a series of smaller transactions. They have varied a little bit in terms, but in general, the vast majority of the investors in have been very long-term shareholders, as opposed to those who want to own the stock for 15 minutes.

And so I think that has been relatively healthy. I'm not so sure the market sometimes necessarily has responded that way. These smaller transactions have allowed us to be a little bit more efficient in dilution. Well we still need to raise additional cash. We have a variety of different options that are in front of us, but it is certainly not an easy time.

Unidentified Analyst

Right. So you have sufficient capital to go forward right?

Steven Sprague

We have sufficient capital to go forward. I think, at the same time, we do directly have short-term cash needs. Underpinning that is, we have a tremendous revenue stream. We will generate $12 million to $14 million out of our licensing deal. You could become a cash flow positive company in an extremely short period of time. You just wouldn't necessarily get next year's business.

So the company's revenue stream is growing strongly but we do still have some investment need. Hopefully, we'll be down with that in the course of fourth quarter it depends on how that forms up if we're done. Once the company is able to accomplish that we should bridge to cash flow positive. I think we're taking the necessary steps to achieve that.

Not on speculation of our enterprise revenue growing, or some massive change in how our licensing is, or our additional customers coming on board right now, but based on the contracts we have in hand today and the expenses we know we have, we believe we can get the company aligned to be a cash flow neutral company. And we're taking the steps to do that.

Unidentified Analyst

Right sounds good. Steven I appreciate your time. Thank you.

Steven Sprague

Thank you.

Operator

And our next question comes from the line of [Dan Goldman]. He is a private investor. Please go ahead Mr. Goldman.

Unidentified Analyst

Just a few questions, the number of employees today and in the near future?

Steven Sprague

So we're around 110 employees today. And it will depend on what the ultimate number is, but it is probably in the 85 range that I would say is our general target area. Some of that comes from a consulting perspective. Some of that comes directly in employees. And some of that comes from the Wavexpress transaction where we have about 15 employees within Wavexpress, which we hope to have either acquisition or independently funded.

Unidentified Analyst

Okay. Thank you. And also TCG membership why are they having such a hard time adopting this technology?

Steven Sprague

I think some of it stems from the very early days of the launch of Trusted Platform Module. And in many cases that actually goes back a little bit further in history. Microsoft and Intel both had some fairly high profile failed attempts at bringing identity into their platforms, and really had a very forceful negative reaction from the marketplace, because nobody wanted a Microsoft ID or an Intel ID inside your computer.

As a result, the Trusted Platform Module, which is a very open vendor neutral, it does not start with an identity. It is a container to secure identities. So you could have your Citibank identity, or your Amazon identity, or your Boeing identity, or whatever in the box. And so, they were very quiet when it launched. And as a result what we didn't see is the venture community funding, 25 little start-up companies to all go pursue this market that was being created.

And so, the hype cycle has been left to a very few small cadre of folks; Wave, a few of the chip vendors, to a certain extent Infineon, although they are a very big chip company, and a little bit to the OEMs. And the OEMs aren't necessarily used to leading technology into the marketplace.

And so, finally when the TPM actually got to some scale and volume and it actually got interesting for the enterprise, there was a general sense of, well, that's been there for a long time, we still don't know what to use it for.

And I think, really, just now as it's starting to come clear that, well, if the future is cloud computing and we're all going to be logging on to everything we do all the time, then what's the authentication token, what's the standard way that we secure our relationships to all of these services?

What we need is what feels like a set-top box. When you go and watch ESPN and then you switch the channel to Discovery, it doesn't ask you to log in. And the reason it doesn't is because inside your set-top box there is a security chip that knows you either did or didn't pay for your subscription to ESPN. And that's the capability we're bringing to the PC.

But it's been very interesting to watch a component of the PC industry where there is basically no venture deployed. The investment in this space has been a few hundreds of millions of dollars, but it's been done by big companies and it's been done by Wave. And as a result, we find ourselves with a market where Wave and Infineon basically split the marketplace today in the distribution of software.

We are way, way, way out ahead of anybody else who is even thinking about it and I think, therefore, we've created a gap. And we are beginning to see the enterprise wake up and see now, how can we use this to our benefit and how can we control and manage a relationship with our customers on a service provider basis?

But it's still in the early stages. And we as individual users have to begin to demand it, and to that end, we have some innovation still to do. I think we have to help find an application where we as an individual consumer. So I as a professional consumer can use my TPM with a service provider without asking my IT department the permit to turn it on.

For example, connecting myself to Citibank would be a perfect example. So I need a large service provider to turn it on. The Yahoo Mail or AOL or Google, any one of those could leverage this, and you would then have no passwords to your mail account. And we think that there is a real value proposition for someone to come out with a professional online email where it's secure as opposed to Yahoo Mail system where Sarah Palin had all her email stolen because it's completely insecure.

Unidentified Analyst

Okay. And if I'm reading it right, is the cash flow breakeven you're shooting for the end of quarter one now?

Steven Sprague

We get fairly close before Q4, but yes, it is Q1.

Unidentified Analyst

All right, thanks so much.

Operator

And our next question comes in the line of [Robert Iler]. He is a private investor. Please go ahead.

Unidentified Analyst

Hi, Steven. A couple of questions. First, I wanted to clarify something you mentioned earlier in the conference call. Did you say that revenues from licensing should almost double in the fourth quarter from the third quarter levels? I think you said that.

Steven Sprague

That's correct.

Unidentified Analyst

Okay, fine. And the other question was, just curious; the Seagate FDE drives with Wave, how many units were sold in Q3?

Steven Sprague

I think it was between 3,000 and 4,000.

Unidentified Analyst

3,000 and 4,000 units?

Steven Sprague

Yes.

Unidentified Analyst

Just basic units?

Steven Sprague

No, I'm thinking by month. So let me clarify because I'm getting confused between two different numbers. So our enterprise seats, I think, were between 3,000 and 4,000. Drives were about three times that.

Unidentified Analyst

Okay, because the last quarter you had said it was under 20,000 and it was less this quarter than Q2?

Steven Sprague

No. The volume has continued to rise. I think it was 120,000 to-date but the volume has continued to rise. What continues to be true, and it was true last quarter, is that there is an incredible list of companies who have bought a few. And they're in essence trialing the technology.

And I'm not quite sure how to read this yet, but the Massachusetts Data Protection Law that just came into effect, my wife running her small little business with two or three employees should have an encrypted drive in her PC or she is in violation of the Mass Data Encryption Law. Okay?

Unidentified Analyst

Got it.

Steven Sprague

So I keep looking at this and going, now that's only been a law for four weeks. So let's be fair to everybody that first-off I'm not worried that they're going to come storming into my house and fine my wife for not having appropriate data protection policies on her single machine. Right?

Unidentified Analyst

This is only Massachusetts, right?

Steven Sprague

This is only Massachusetts.

Unidentified Analyst

Okay.

Steven Sprague

But this is Massachusetts and fairly closely followed by Nevada. But it basically says if on your computer is first name, last name, and any of the other following information, a social security number, a bank account number, you do not need any PIN numbers, just the person's bank account number, driver's license or any other government ID card number, then you must have the data encrypted. So anyone who currently does sort of state tax filings would be a perfect example. You have their social security number.

So the question is when I go down to Staples here five miles from the office and buy a Dell Vostro PC off the shelf, it really should be sold with an encrypted drive. And how long is it going to take for everybody to get that message?

So let's just play that a little bit larger because that's sort of a very simplistic example. I have to audit my service providers. So my lawyers, my accountants, ADP, who does our payroll, our healthcare guys, I know have to ask them the question of if you've got any of my employee data on your machines, can you provide me with a certificate that says it's encrypted?

So being the fun, entertaining company in the data encryption space, we've tried this and barely anybody knows what we're talking about. So there is an education, but they have begun to hear about it. They just haven't focused on the fact that it is January 1. Okay? So even internally inside Wave, we hadn't yet gone and put encrypted drives in the accounting machines in Wave where all the payroll stuff is done. And we will have accomplished that by the 1st of January.

Now, they're not mobile machines. So you wouldn't think of them as risks, but if somebody broke into our office and stole one of those computers, by Mass State Law that has to be encrypted. It doesn't say on mobile platforms only. So it's a very interesting challenge as we go down this path now where we've just had a fundamental change in the way the law is written, is anybody going to enforce it?

One of my very large service providers actually has McAfee software deployed on their platforms. And so, I asked three or four really silly questions, which completely proved to me that the software was incorrectly setup. And so, while they have that software actually deployed, because it has too many configuration options, their IT department has it in a state which is not secure.

And so, we're off following that path as well. But I'm a pretty sophisticated data encryption person to go ask this set of questions. So it's been intriguing to watch the impact of this kind of a law and it's going to take a year or more for the effect to roll across all the enterprises, big and small.

So there is no question that the demand and need for full disk encryption is absolutely there. There is a regulatory requirement for it. You're seeing it move into hardware. If you're looking for a significant event over the course of the next period of time, look for other drive manufacturers adding encryption. So it's great that we've got Hitachi and Seagate and Toshiba. You want to see more.

And I think as you continue to see more, what you're seeing is demand that's been created in the market that is ultimately going to be moved completely to hardware. I think we're in a great position as an OEM supplier of hardware to be the software in the box and provide the enterprise tools not only to manage their drives, but to manage their TPMs and that's what we're focused on doing.

Unidentified Analyst

Okay. All right. Thanks.

Operator

Our next question comes from the line of [Walt Paulson.] He is a private investor. Please go ahead.

Unidentified Analyst

Hi. Steven, I missed some of the call earlier and maybe you've covered this, but several calls ago, I guess it's been a couple of years now you had a couple of million TPM opportunities. Could you expand on where those are at?

Steven Sprague

Sure. So, there are a couple I can reflect directly to specific accounts. One of them is a large electronic supplying company and they continue to be an opportunity. They haven't ordered anything yet of any substance. I think they have 40 or 50 units that they have purchased.

We have a large consulting firm that's been an opportunity for about, I don't know, 16 or 17 months now. I think they've tested pretty broadly. They are getting pretty comfortable with it. And we have some newer opportunities that are in that scale.

I have like three or four automotive companies right now that fall into that category, but I'm really questioning whether or not they can pay their bills. I'm not so sure my shareholders want $1 million worth of trucks, but that might be the most effective way to get paid, you know where they have thousands of seats and they're interested in turning them all on.

I would say some of the challenges they're waiting a little bit for somebody else to have shown action, and that is partially the frustrating part in this. The other part I would say is the educating of the network equipment providers so that they have the right level of support on the ground from their other experts in technology. And I would say we're making good progress on that front.

So if we'd closed a couple of the million opportunities that are out there, I think this whole market would have moved faster. And they haven't picked something else, they haven't gone away. They just haven't deployed this yet.

Unidentified Analyst

Okay. So you haven't been able to close these, have you been able to open up any other accounts that has that kind of volume opportunities? I mean, because…

Steven Sprague

Yes. I met with a guy two weeks ago who has got over 120,000 seats and wants 32,000 seats relatively soon. I'm not going to put that in my projections until they close because my experience so far is, nice speech, show me the money. It's an enormous opportunity for -- I'm sorry, go ahead.

Unidentified Analyst

I was going to say what does Wave Systems need to do better than to close some of these pieces because you see the news all the time about things getting hacked and all kinds of things that are ripe opportunities for Wave Systems to close this, close this, but it's not closing at a rate that's helpful for the company. So I guess my question is what does Wave need to do better?

I'm not talking about the industry now because the industry has shipped millions and millions of TPMs and Wave may have done quite a bit to set the table for Wave. So now I'm asking is what specifically does Wave Systems need to do better to close business that helps the company and the shareholders?

Steven Sprague

I think we need to do a couple of things. Some of them are to better demonstrate the value of this capability, which is just pure marketing. I would say we're focused not on trying to hit homeruns, but trying to hit base hits. And so, you're seeing some of the action steps that we need to do and we need to do more of which are generate case studies, showing clear use of the technology and the return on investment in turning this on.

And we try and reflect that pretty continuously on our website. We have more information internally that we can share with others. We have good reference accounts today that we can share with others. And so, we're making those steps.

I would say secondly is a technology piece, and some of that is just based on the continued investment in this technology. And I think we have to be balanced in our approach on that, which is to make it easier to use and to turn on a TPM for everybody at large. I don't think it's that complicated, but clearly it's more complicated than people would like to see. And so, we have to continue to work on improving the quality of interfaces, improving the quality of the experience in turning on your TPM.

I would say the third one is also something we're very focused on in investing in is having other industry players than Wave telling everybody to go turn their TPMs on. And to that end, I think we're making some progress, but still not as strong as I'd like to see. I'd like to be not the only company in the world that has turned my TPMs on with some scale inside my enterprise. I think if an organization like Intel is trying to sell you technology in their chipset, I think the question is why aren't not using it internally?

I think it's a pretty valid question and we push them really hard on that front. I think the same is true of many others. I think this is a technology where you can't even fathom how cool it is until you have actually used it yourself. When you walk into my conference room it just connects you to the wireless, the hardware level certificate with no passwords and with no risk of somebody sniffing our Wi-FI from the parking lot. Why hasn't everybody got this on?

Unidentified Analyst

Excuse me, but that's kind of my question. You have companies that have had trials for two years that have seen this cool factor of what you can do with TPMs and they still don't get it?

Steven Sprague

Well, they're just this year reaching a point where all their platforms start to have it. Right? So you have to go through a hardware upgrade cycle. In the first period of time everybody looked around and said we have no TPMs. I think we're past that argument. We certainly have some organizations that have a few hundreds and a few thousands turned on. But we have not seen what I would consider the million accounts yet where somebody has gone and turned on 10,000 seats.

Unidentified Analyst

All right. Thanks.

Steven Sprague

Thank you.

Operator

And our next question comes from the line of [Al Kirkoff]. He is a private investor. Please go ahead.

Unidentified Analyst

Good evening.

Steven Sprague

Good evening.

Unidentified Analyst

How much cash did you have in the bank yesterday?

Steven Sprague

How much cash did I have in the bank yesterday?

Unidentified Analyst

That's a balance sheet question, how much cash did you have on hand?

Steven Sprague

I don't know if I can quote it off the top of my head, not very much. Now, to be fair, I'm expecting my Dell royalty check which will bridge me on my next cash needs. So I have been very clear. I have been living fairly hand to mouth on cash for the last, I don't know, three, four months.

Cash specifically in the bank account versus my cash flow statement as to how do I get from A to B to C to D are a little bit different statement. And then, part of the challenge is can I tell you to the penny what my Dell royalty report will be for the month of October? The answer is no. And I wish I had greater visibility into it.

I probably had greater visibility in the first half of this year when we were only shipping D-Series platforms, I could have told you within 100,000 or 200,000 PCs what their volumes were and what my check would be. Today, I live in a mixture between old and new, and I don't know where that exact mixture is. So it's much, much harder for me to predict plus or minus $200,000 or $300,000 what my exact check is going to be.

Unidentified Analyst

Okay. All right. Share count is approximately 57 million share count that you reported. I read it that it does not does not reflect what additional shares would be issued if all of the outstanding convertibles were converted and all of the outstanding warrants were exercised.

Steven Sprague

That's correct. And to be fair, I really would point you to my Q's and my annual report because I have stock options that are at $32.'

Unidentified Analyst

Yes.

Steven Sprague

You can decide whether you want to put those in the share count or not.

Unidentified Analyst

Yes.

Steven Sprague

If you put them in the share count I think we'll all be rich.

Unidentified Analyst

Yes. I just wanted to make sure that I understood your Q right that we're looking at unconverted shares, unexercised warrants.

Steven Sprague

That's right.

Unidentified Analyst

Okay. Final question related to listing. I'm not asking you to speculate on what NASDAQ will do. But if NASDAQ does decide to de-list, what would be plan B for trading? Are we looking at Over-The-Counter Bulletin Board? Are we looking at not being able to do Over-The-Counter Bulletin Board and being traded on the [sheet]?

Steven Sprague

My understanding is we would trade Over-The-Counter Bulletin Board.

Unidentified Analyst

Okay. That's all I had.

Steven Sprague

But let's wait and see what NASDAQ does. I mean, again, we live in sort of interesting times right now as it relates to that. They've certainly gone out of their way to give companies a little bit more time during these tougher economic times. And I think a tremendous amount is in control of where the share price is over the course of the next few weeks.

I think if you are a long ways away from listing, they will probably de-list you. If you are fairly close, they might give you some more time. So I don't think there is really an absolute there.

Unidentified Analyst

Well that is why I didn't ask you to speculate or where we would be. So thank you very much.

Steven Sprague

Thank you.

Operator

Our next question comes from the line of [Harvey Stern]. He is a private investor. Please go ahead.

Unidentified Analyst

Hello, Steven. Thank you for all of your hard work.

Steven Sprague

Thank you.

Unidentified Analyst

There is a couple of different kinds of questions I would like to ask you. What protects us from like a hostile takeover? It is our intellectual property rights?

Steven Sprague

My 20000 individual shareholders what price will you take? And I mean this in the most polite way. Wave is a company that doesn't need a poison pill. We don't need something in the hands of our directors et cetera. There are certainly some larger shareholders in the company, but the vast majority of the shares in the company are held in the hands of individual investors.

So it would be unlikely that you could assemble in a small room enough people to reach 51% of the company and therefore negotiate a deal with them. And so, to extent that somebody walked in tomorrow and decided to buy the company they would have to put the price on the table that would get more than half of the shareholders to say yes.

Unidentified Analyst

Okay. A lot of speculation on that on the Board of course. The next question would be a lot of the large companies that have implemented us, say Dell, Intel, isn't it in their interest as they have invested a lot of time, and have invested a lot of money, that we survive that we stay in business and that we prosper?

Steven Sprague

Very much so. And to that end they do a lot of things to help us, at the same time it is not necessarily in their best interest to own us, would be the best way to describe it, right? So today Wave plays a wonderful role of being very neutral in our ability to provide.

And that really is very much in the best interest of the companies with whom I work, because when you walk into a large corporation and you can pick a lot of different ones. They very typically do not have only one brand of PC internally.

Unidentified Analyst

Right.

Steven Sprague

However, they really want a single console to run all of their PCs. And so, yes, we are a tremendous supporter of Seagate. They have been an incredible technology partner and we have brought some of the greatest products in the world of security to market together.

And it is just as important to Seagate that I offer a similar capability to a company like Toshiba. And the reason is that it makes the enterprise feel more comfortable that they're not buying into a proprietary solution. So Seagate is on the other side of that question, they're going the say, well it is also just as important to us that we can show somebody like they did today with McAfee showing support for their drives.

And so, now the end customer has ultimately a choice. They are not locked into a single technology vendor, because we have some proprietary linkage to some thing. At the end of the day, however, where we gain our competitive advantage is our presence from an installed base perspective, whether that's an installed base with somebody like Dell, where not only am I on today's machines, but I also am on three-year-old machines.

So if you are an all Dell account and you have been buying Dell for the last three years then you know that the Wave software is going to run on every single silly piece of hardware you have in your company. And that is very useful. Then ultimately if I get inside the corporation, and I become part of their infrastructure, then they are going to want to know that as they buy new PCs that it's going to run with the Wave software going forward.

So it is a market where you want to compete on functionality, and capability, and feature and you want to build your installed base. That is why I continually reference the fact that we have 40 million installed copies of software. Another way to say that is there are 40 million users where my software has been qualified to run on their desk. Nobody else can say that.

Unidentified Analyst

Okay. One more short question, do you believe that Infineon is very solidly embedded in HP? I'm sure we gave it our best shot to get them. Is that something we should even have in the back of our minds at this point?

Steven Sprague

I think the conversion of HP to Wave would be extremely hard. Yes, I think Infineon is pretty solidly embedded. And I would say the industry is pretty focused on making sure there is two of us.

Unidentified Analyst

Okay. Steven, thank you.

Steven Sprague

They wouldn't want me to have all the business either for all sorts of reasons.

Unidentified Analyst

Thank you very much.

Steven Sprague

Thank you.

Operator

Our next question comes in the line of (inaudible), private investor. Please go ahead.

Unidentified Analyst

Hello. Thanks for taking my question.

Steven Sprague

You are welcome.

Unidentified Analyst

Could you address the fact that none of the Directors own or other insiders own a substantial amount of your stock? It is kind of discouraging for us who don't know anything out here to be owning stock if the insiders don't.

Steven Sprague

So I'll reference it with a specific example. In one of our last rounds of financing one of my Board of Directors was a participant. You can see all the filings that are out there. And it was very, very difficult to accomplish that from a legal perspective, with all the lawyers et cetera. And there is an equally difficult side on the other side, which if any of them ever wanted to sell any stock, it is an equally difficult dilemma.

So from the Board of Director's, perspective the primary role of our Board of Directors is to represent the shareholders and in a very strong and independent way provide oversight over management and over our accounting procedures and process and ensure that we're doing everything in a very straightforward manner. And I think our Board does a fantastic job in doing that and providing me with great guidance.

From an equity investment perspective some of them certainly have the capability to have a stronger investment portfolio others don't, but they're original purpose and reason for joining the Board wasn't because they had a $1 billion in cash in the bank, but because they had specific areas of expertise and could help us with our business.

And I'll just talk to my specific role. So I have been an employee of Wave since 1991. I was never a founder of the company. So every share of stock that I have has either come through part of my compensation or because I purchased it from the company. I have participated in the employee stock purchase program which is a program buy, which is approved by the shareholders, as to a method for me to buy.

I participate to the maximum legal allowed level. And I have been consistently buying stock ever since the first day the employee stock purchase program was put in place, because it is part of a program buy, I am not allowed to report those purchases they're just part of the employee stock purchase program.

So the fact that I bought $25000 worth of stock in the last six or nine months whatever the last time the program buy actually went in place, doesn't show up in any filings anywhere other than once a year when it changes my actual stock participation.

Unidentified Analyst

Is that something that Directors could do as well?

Steven Sprague

No the Directors can't participate in the employee's stock purchase program. It would theoretically be possible to put in place a Director's stock purchase program, but I don't think we have specifically contemplated that. So they're very focused on the value, and we all are.

We are here to work for our shareholders and to drive the value of the shares. And all of us would make way more return than our cash compensation if we were successful in driving the stock value by a factor of 10, including my Board of Directors.

Unidentified Analyst

All right. Thank you. In terms of their area of expertise do any of them have particular expertise in sales?

Steven Sprague

Certainly, and I would argue that Nolan Bushnell has been a salesman his whole life. He founded a very successful consumer products company, and certainly has had some not so successful consumer products companies. So I think he has had challenges both with something that is ramped with really good volume and something that has had really strong challenges. And I could go through each of the individuals, but yes they have very strong sales capabilities and just raw technology capabilities as well.

Unidentified Analyst

I saw on one of the boards there was a print advertisement that you had in one of the government publications. Do you do any print advertising directed to public, commercial IT people?

Steven Sprague

So we do a very little bit. We really rely more on can we participate in our partner's direct advertising just because they have so much broader reach than we do. So, if you look at some of the Dell Flyers that are going out now, they talk about the data encryption in the drives. And we find that to be a much more effective path.

Today about 85% of all of our new customer contacts come in through our partner's direct marketing efforts. I'll use a specific example. I think Dell mailed out just under 50,000 individual flyers that went out to IT professionals in small medium business across all of North America.

Unidentified Analyst

Yes, I remember you mentioning that.

Steven Sprague

Right. So those are the kinds of things where it didn't cost me anything. We participated in the creation of it and in the fulfillment of it as well. But we didn't have to write a check to send something out to 50,000 people because we don't have the resources to do that.

Unidentified Analyst

I would just love to see something in some kind of IT-directed publication that really puts out the case for the TPM. I've never seen that from Dell or any of them, and I know you could do it if you tried. Sometimes it takes a few iterations to get it right. I would love to see you give it a try.

I just have one more question. I'm a little concerned about the rapid rise in payables and I was wondering if you could maybe explain how you're able to do that and whether you plan to maintain that at over $6 million, or whether maybe bringing that down might interfere with your breakeven timeline?

Steven Sprague

Certainly, we'd like to bring or payables down some. It's one of the reasons why we need to raise additional cash. Depending on how strong the revenue sides are, we've taken into contemplation as far as our breakeven timeframe, but we need to bring it down. Our vendors have been very supportive of us, but it's still a challenge.

We're going to have to bring that number down some, and that's certainly contemplated within our current expectations.

Unidentified Analyst

Okay. Thanks very much for your time.

Steven Sprague

Thank you. Thanks for your questions.

Operator

And our next question comes from the line of [Mark Mesony], private investor. Please go ahead.

Unidentified Analyst

Hi, Steven. How are you doing?

Steven Sprague

I will just say I think maybe we'll round this up as a last question. I'm sure there people are waiting to ask additional questions, but we're at 6 o'clock already. So I think an hour and a half is long enough for everybody to hang on the line. So I'll answer your question, Mark, but afterwards we'll wrap it up there.

Unidentified Analyst

Okay. I have got a simple question. Did you see any revenue from the Olympics?

Steven Sprague

We did a little bit. The most interesting data we got from the Olympics was that on average a viewer who watched our application watched five hours of video. To give you some context on that, a viewer who watched on the sort of generic streaming Microsoft platform watched one hour of video during the length of the Olympics. It was an interesting event because it had a very finite number of days. So you have an audience that's captured for a period of time.

And so, I think we proved the viability from the advertising perspective that you had the captured eyeballs for a significant period of time. Our intention was not to test whether or not ads would be watched online. And if you wanted the Olympics you may have noticed that almost all the advertising were four or five Lenovo ads, which made you just about insane by the time you got done watching five hours of the Olympics. That was all prearranged by NBC.

So we had some very small revenue participation. It certainly did not cover the cost of the event in any way, shape or form. But I think we accomplished the purpose which is we really demonstrated the viability of a download and play capability within Microsoft Media Center. I think it's clearly a direction that will add value to the media capabilities of the PC on a long-term going forward basis. So, hopefully, we can be keyed as part of that.

Unidentified Analyst

Steven, did you say that at one point in time that Wavexpress was possibly for sale, and would it be in total or just part of?

Steven Sprague

So it is today.

Unidentified Analyst

It is for sale. Is there a sale price? Is there an asking price on Wavexpress? What's your best price on that?

Steven Sprague

If you call me, I'll tell you. So it depends on the reality at the end of the day. Yes, we have a variety of different conversations that are active right now. I don't think I will reflect the price on it. I am under a very strong level of pressure to get that transaction done immediately and that will ultimately affect price.

Unidentified Analyst

Okay. Thank you.

Steven Sprague

Thank you. With that, I think I will wrap-up our call. I appreciate everybody's time and effort and support. If you have questions, please send them to me on email. Feel free to give me a call. I will endeavor to answer all of them. And I look forward to your continued support and thanks for your time tonight.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you would please disconnect your lines.

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